Source: Bloomberg. Federal Funds Target Rate – Upper Bound (FDTR Index)

Last week the Fed raised rates by a 4th consecutive 75 bps rate, something widely expected by investors given that inflation is running at multi-decade highs. Markets were not surprised and Fed Chair Jerome Powell said “It is very premature, in my view, to think about or be talking about pausing our rate hikes” adding that he did not believe the Fed had yet “overtightened,” leaving the door wide open for the pace of rate hikes to remain aggressive.

Despite the cautionary tone by Powell, investors remain anxious as the Fed tends to lift rates until something in the markets goes awry. During the last 11 hiking cycles, 8 of them ended in a recession – ample evidence that the central bank increases to the point where something in the market snaps and the economy breaks. The main reason for that (terrible) track record is central banks’ forward guidance is based on lagging economic indicators such as unemployment and core inflation. That is why monetary policy works with a long lag: last week’s hikes won’t affect inflation tomorrow, but they could change it 9 to 12 months from now.